Fortune Magazine publishes the above chart and says:
There should be a rational relationship between the total market value of U.S. stocks and the output of the U.S. economy – its GNP. [Warren Buffett] visualized a moment when purchases might make sense, saying, “If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you.”
Well, that’s where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham’s statement about the stock market: “In the short run it’s a voting machine, but in the long run it’s a weighing machine.
Now, I don’t have a crystal ball, but it appears that most of the world’s greatest Value Investors (a technical term for ‘cheapskates’) are hopping back into the market, as this article – this time from Forbes – says:
Over the past several weeks, more and more of history’s most successful investors have turned bullish. Warren Buffett, John Neff and David Dreman–all of these gurus and others have said that they are now in full buying mode. Even Jeremy Grantham, a notorious bear, has said that stocks are cheap, as cheap as they’ve been in two decades, in fact.
I’m wondering: if you were prepared to buy when the market was high and people were beginning to speculate whether it would last, why wouldn’t you be prepared to buy (and hold for the long-haul) now, when the market is closer to the bottom than it was then?
I have some money that I can get an immediate 33% ‘kick’ by moving it from the US to Australia (due to favorable exchange rates), yet I am sorely tempted to keep it in the US and trade options with it, as I feel that there will be great volatility between a Dow of 8,000 and 9,000 … the time when traders make (and lose) fortunes.
Not suggesting that you do the same, but I am suggesting that if ever there were a time to buy (for the long-term), it might be right now … there might be deeper bottoms still to come, but there will be higher, highs as well … by buying and holding now, you will ride out those bottoms (if they come) and guarantee that you will reach the highs (when they come) … how can that be a bad thing?
Thanks for a great, informative blog.
Just wondering, and this is a very simplistic view, that altho US stocks are definitely cheap in the long term, wouldn’t the value of US dollar also expected to decline sharply also in the long term? The USD view is conventional wisdom, with all that money being pumped/created for rescues and with current strength due to flight to safety in US treasuries. If that’s the case, it would most probably take the edge off the returns for US investment?
Otherwise, in your case, wouldn’t it be more prudent to look for long term investments in, say, Australia?
Just looking from viewpoint from someone in Thailand
All the best
Arkhom
@ AJC – Can you elaborate on how you would get a 33% “kick”? I understand that the Aussie dollar is equal to .66 US, but don’t you have roughly the same (or less) buying power in Australia with your new, higher, total amount?
Could you also walk us through your options buying process? How do you pick a company (or index) to buy? How do you feel about covered vs. naked? Do you do it yourself or do you have people for that? etc. etc. etc.
Thanks a million!
@ Arkhom – Yes, you are right: for a US investor the value of the $US is somewhat moot: there are effects on the stock market, but they are indirect.
Ryan also adds that there are cost-of-living differences to take into account: but, if you live in another country, ultimately the money that you do have will end up there for spending (unless, you keep a small ‘slush’ fund and travel a lot).
@ Ryan – Try these posts:
http://7million7years.com/2008/10/21/making-money-201-whoohoo-time-to-have-some-fun/
http://7million7years.com/2008/07/09/options-as-hedges-one-safe-the-other-downright-dangerous/
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